The legal ins and outs of setting up a business

The Declaration of Independence proclaims that all people are endowed by their Creator with certain inalienable rights, and that among these are life, liberty and the pursuit of happiness. These words are an invitation for us to dream big dreams. Two of the great American dreams include owning one’s own home and being one’s own boss.

What’s involved in the pursuit of these dreams? For some it is simply a matter of good fortune, or rich parents, or being heavily vested in the stock market or Teton County real estate in the 1990’s. For the rest of us it may help to know a few things as we embark on the quest.

Let’s talk business first — the business of being your own boss. So you want to give up your paying job with evenings and weekends off. You can’t seem to shake the idea of putting in a 60-hour work week for little or no pay. Owning your own business is something you have got to do. You’ve had this idea whirling in your mind for a long while now. You know it will work. Where to begin?

It depends on the business concept, of course, but visits with a lawyer, accountant and banker should probably be on your agenda.

Ray Martin is a master electrician with 15 years experience. He has worked for the two largest electrical contracting companies in the valley on all kinds of residential and commercial projects. Ray owns a pickup truck, a tool box full of tools, and a Labrador retriever. Ray is ready to forge out on his own.

He contacts a lawyer, Neal Able, whom he has carefully checked out through friends and acquaintances who have previously used Neal’s services and are satisfied with his work. At their first meeting Neal explains the basic business options available to Ray: sole proprietorship, partnership (general and limited), corporation and a limited liability company (LLC).

A sole proprietorship is the simplest of all business forms. Its primary attribute is actually the lack of a formal legal organization; it is synonymous with the owner or proprietor of the business. Next time you see Emma, the neighbor kid, selling lemonade at her stand, think sole proprietorship.

A partnership is an association of two or more persons carrying on as co-owners of a business for profit. A general partnership can be organized with little expense or formality. If Emma invites Jane to participate in making and peddling lemonade in the driveway, they have entered into a business relationship as partners.

Since Emma’s dad is a lawyer, he wisely insisted that the girls sign a written partnership agreement. The best time to agree on all the ground rules is at the very beginning of the venture, when each partner is hopeful and excited and working in unison with the other partner(s).

For those adventurous souls who shun formality and do not have a written agreement, the Wyoming Uniform Partnership Act set the rules. Think of it as divorce court for business partners.

Simple and cheap may not always be the best alternatives when it comes to setting up your business. Those potential advantages need to be weighed against the risk of personal liability.

Emma, as the sole proprietor of her lemonade stand, has unlimited personal liability for her business debts and all other problems associated with her business, including a lawsuit by the neighbor who accuses Emma of violating the homeowner covenants by operating a business within the subdivision. Emma’s business and personal assets, securely housed in her piggy bank, may be seized if the neighbor gets a money judgment against her.

Emma and Jane, as business partners, may have a somewhat different financial risk depending upon the nature of the liability. Each is not necessarily exposed to unlimited personal liability if someone sues the partnership, but personal liability does exist. A general partner is liable for the debts of the business, and for the wrongful acts of partners. A creditor of the business generally must first look to the partnership assets, and the creditor of an individual partner to the assets of that individual. There is or may be personal liability over and above the amount Emma and Jane invest in the enterprise.

Selling lemonade is generally less risky than, let’s say, doing the electrical wiring at the local hospital. Given the risks involved as an electrical contractor, both physical and financial, our man, Ray Martin, is probably well advised to consider a business entity which provides him with limited liability. Neither a sole proprietorship nor a general partnership have this very attractive feature.

Neal Able and Ray Martin begin to discuss business entities which will provide Ray with limited liability. The most common are the corporation and the LLC.

Just then the phone rings. It’s Neal’s wife reminding him not to be late for their son’s soccer game. Neal apologetically asks Ray if he would mind rescheduling their meeting. Ray is actually relieved, since he is already 10 minutes late to pick up his daughter from karate class. They agree to meet in a couple of weeks, which is great for us because that’s precisely when the next issue of the Guide comes out.